Evolutionary Finance

60 Pages Posted: 4 Jul 2008 Last revised: 17 Dec 2008

See all articles by Igor V. Evstigneev

Igor V. Evstigneev

University of Manchester - Economics, School of Social Sciences

Thorsten Hens

University of Zurich - Department of Banking and Finance; Norwegian School of Economics and Business Administration (NHH); Swiss Finance Institute

Klaus Reiner Schenk-Hoppé

The University of Manchester - Department of Economics

Date Written: October 20, 2008

Abstract

Evolutionary finance studies the dynamic interaction of investment strategies in financial markets. This market interaction generates a stochastic wealth dynamics on a heterogenous population of traders through the fluctuation of asset prices and their random payoffs. Asset prices are endogenously determined through short-term market clearing. Investors' portfolio choices are characterized by investment strategies which provide a descriptive model of decision behavior. The mathematical framework of these models is given by random dynamical systems. This chapter surveys the recent progress made by the authors in the theory and applications of evolutionary finance models. An introduction to and the motivation of the modeling approach is followed by a theoretical part which presents results on the market selection (and co-existence) of investment strategies, discusses the relation to the Kelly rule and implications for asset pricing theory, and introduces a continuous-time mathematical finance version. Applications are concerned with simulation studies of the market dynamics, empirical estimation of asset prices and their dynamics, and the evolution of investment strategies using genetic programming.

Keywords: Evolutionary Finance, Wealth Dynamics, Market Interaction

JEL Classification: G11, C61, C62

Suggested Citation

Evstigneev, Igor V. and Hens, Thorsten and Schenk-Hoppé, Klaus Reiner, Evolutionary Finance (October 20, 2008). Swiss Finance Institute Research Paper No. 08-14, Available at SSRN: https://ssrn.com/abstract=1155014 or http://dx.doi.org/10.2139/ssrn.1155014

Igor V. Evstigneev (Contact Author)

University of Manchester - Economics, School of Social Sciences ( email )

Oxford Road
Manchester, M13 9PL
United Kingdom
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HOME PAGE: http://www.evstigneev.net

Thorsten Hens

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 32
Zurich, 8032
Switzerland
+41-44 634 37 06 (Phone)

Norwegian School of Economics and Business Administration (NHH)

Helleveien 30
Bergen, 5045
Norway

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Klaus Reiner Schenk-Hoppé

The University of Manchester - Department of Economics ( email )

Arthur Lewis Building
Oxford Road
Manchester, M13 9PL
United Kingdom

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